Management

Outsourcing, Part 2

24 Aug, 2006 By: Robert Green

More issues to consider when deciding whether outsourcing is for you


In the August 10 issue of CAD Manager’s Newsletter (click here for archives), I began a discussion of outsourcing by defining some common terms and concepts. This time I'll continue the discussion by talking about the business factors that affect your company's decisions to outsource or not.

Thinking Faster and Cheaper

In my series on CAD management finances, I introduced you to a concept called the faster-cheaper paradigm. This paradigm simply states that your management likes anything that gets work done faster or cheaper, and ideally both. Outsourcing is no different and should be subjected to the faster-cheaper paradigm of work just like any other process change you might want to make.

So in order to decide whether outsourcing can genuinely generate faster-cheaper work results, I encourage you to analyze your company’s needs in terms of common outsourcing parameters and how you think they'll be managed. Once you analyze your outsourcing possibilities using this faster-cheaper methodology, you can apply the same type of ROI (return on investment) metrics to outsourcing that you use with any other business process. The difference will be that you’ll actually know whether outsourcing makes sense. And believe me when I say many companies have rushed in to outsourcing without this financial analysis and have experienced dire consequences as a result.

Cost Factors

Last time, I talked about some possible cost factors that you should consider for outsourcing. I'll condense those factors into several groups here, along with their typical effects on costs:

Labor rates. Typically lower for outsourcing or else you wouldn't consider it. However, lower labor rates are only part of the story, so don't fixate on them.

Outsourcing coordination. Typically a new cost. Prior to outsourcing there was no outsourcing coordination, so now it's an expense that you must factor into the overall outsourcing picture.

Outsourcing partner training. Typically a new cost. Just because you brought in an outsourcing partner doesn't mean they know what you need them to do. You'll have to train them, and training costs money.

Contracts and legal considerations. Typically a new cost. Like any other new vendor you might work with, your company will have contract and legal considerations to worry about, and outsourcing presents new challenges in terms of global law, customs and intellectual property. For many companies, these are new and uncharted waters, and the costs go up as a result.

Culture shift. Typically a new cost as well. What will it cost your company to acclimate to an entirely new way of doing business with new business partners and new lines of communications? These costs are hard to quantify, but they are there and they are valid.

When all these factors are combined, it becomes obvious that outsourcing is only a saving tool if the labor rate savings you achieve actually offset all other costs. So when I say that lower labor rates are only part of the outsourcing story, I’m really telling you to think about all the costs and go into the decision-making process fully informed.

Faster Factors

Now that we have a handle on the cost -- the cheaper part of the equation -- what about the faster part? Does outsourcing offer any opportunity to make our design processes faster? Let's examine a few possibilities.

Follow the sun. This is a work methodology that you can use when you're outsourcing provider is on the other side of the planet from you, thereby enabling them to work during your nighttime. Although follow-the-sun methodologies make it theoretically possible for companies to work around the clock, there is a fundamental disconnect: if you're sleeping, how can you speak to the person who's performing your work? The reality I’ve observed is that follow-the-sun methodologies work with well-trained outsourcing partners who have a thorough knowledge of your standards, work practices and needs. Companies that simply throw outsourced bodies at work without proper coordination simply get junk in return. They get it promptly the next morning, but it is still junk.

Staff augmentation. Another faster factor is that outsourcing really can help you get through temporary staffing problems if you can control the workflow. For example, large-volume scanning, plotting to PDFs, drafting and parts modeling can all be done via outsourcing pretty well, so long as your outsourcing partner has that core expertise. All my warnings about coordination, standards and training still apply in this case!

Business Realities

One other parameter that doesn’t fall neatly into the faster or cheaper metrics I’ve discussed, but does affect outsourcing, is that of expanding markets. I won’t go into great detail, but I do think this trend needs to be mentioned.

Frequently outsourcing to a foreign country is a precursor to doing business in that country. For example, multinational companies like IBM and Hewlett-Packard were some of the first companies to go into India, the Philippines and Japan, and they gained tremendous market share as a result. They were also able to expedite moving into those countries by doing business locally. This strategy is still proving to be practical for large companies that want to gain access to foreign markets quickly. So if your company is trying to expand internationally, outsourcing may be just the first step.

Summing Up

You should now be able to perform a rough analysis of whether outsourcing makes sense for your company based on the faster-cheaper principles I discussed in this issue.

In the next newsletter I will conclude my series on outsourcing by running through some hypothetical examples and presenting some return on investment results. Until next time.

PS: Send me your outsourcing stories, good or bad, at rgreen@greenconsulting.com.


About the Author: Robert Green

Robert Green

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